İŞLETME FİNANSI II - Deneme Sınavı - 14

The risks subject to market risk capital requirements include but are not limited to:

(1) default risk, interest rate risk, credit spread risk, equity risk, foreign exchange (FX) risk and commodities risk for trading book instruments; and

(2) FX risk and commodities risk for banking book instruments. The correct answer is E.

According to the Basel Committee, market risk is defined as the risk of losses arising from movements in market prices. The correct answer is E.

Broadly speaking, credit risk is the risk that a borrower fails to meet obligations for a loan granted. This risk is of vital importance to banks, as their main business involves lending money to be repaid over a certain period, which in some cases, e.g. mortgages, may be 10 to 20 years or more. The quantification and management of credit risk are radically different from market risk, which focuses mainly on changes in asset prices, and which offers an infinite set of probabilities due to available data. The correct answer is D.

With the enhancement of the Basel-II, the Basel Committee added a new class of risk into the calculation of risk-based capital charges. The Committee defined the operational risk as the “risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. 

This definition includes human error, fraud and malice, failures of information systems, problems related to personnel management, commercial disputes, accidents, fires, and floods. In other words, its scope seems so wide that, with no significant prior data available to extract a meaningful and accurate risk profile, the practical application is difficult to immediately perceive.

The correct answer is D.

The Variance-covariance (VCV hereafter) method estimates VaR by first assuming that a portfolio comprises a small number of risk factors (equities, commodities, etc.). Each risk factor is assumed to be drawn from some known theoretical distribution. The statistical distributions of these individual risk factors are combined to yield a single theoretical distribution for the returns of the entire portfolio. This distribution is then used to calculate the VaR of the portfolio. The VCV method is also known as an analytic or parametric method. It is considered the simplest of the suggested methodologies and thus is often used by banks and other financial institutions, for example, for calculating intra-day VaR figures. The VCV approach is generally used with a normal distribution, which significantly facilitates its calculation. Of course, other distributions can be used, but at a higher computational cost. The correct answer is C.

The Basel Committee defines the historical simulation methodology as a simulation approach that calculates the hypothetical change in the value of the current portfolio in the light of actual historical movements in risk factors (Basel Committee on Banking Supervision, 1996b). The correct answer is C.

The Monte Carlo (MC) approach is based on the idea of simulating the changes in the portfolio value by randomly drawing from the imposed theoretical distribution function. The correct answer is B.

Extreme value theory (EVT) studies the tail of distributions and deals with the asymptotic behavior of the extreme order statistics of a random sample, such as the maximum or minimum order. The correct answer B.

Market risk can be defined as the risk related to a financial institution’s financial condition resulting from unexpected market movements in the price level of certain risk factors. These risk factors can be categorized into four main classes: equity prices, commodity prices, foreign exchange rates, and interest rates. The correct answer is A.

The literature on risk management has grown exponentially in the last two decades. The milestones are the 1988 regulation on capital adequacy by the Basel Committee, the release of RiskMetricsTM Technical Document by JP Morgan in 1994, and the release of Basel-II by the Basel Committee in 2000. The correct answer is A.

Merger is a combination of two firms in a way that only one firm survives after combining. The correct answer is E.

Acquisition is taking a controlling ownership in another firm, subsidiary of another firm, or business unit of another firm by an acquirer firm. The acquired firm may continue its existence after the acquisition as a subsidiary of the acquirer. In the opposite position, a divestiture is a sale of all of a company or all of a business/product line to another party in exchange for cash or securities. That means that for an acquired firm, the transaction is a divestiture, while for an acquirer it is an acquisition. The correct answer is B.

Equity partnership: A company’s purchase of stock (resulting in a less than controlling interest) in another company or a two-way exchange of stock by the two companies. An equity interest in a partnership is generally accounted for by each partner in the same manner as an equity investment in a corporation, provided that recourse for partnership liabilities is limited to partnership assets (Finnerty, 2007). The correct answer is B.

Offshoring: The moving of various operations of a company to another country for reasons such as lower labor costs or more favorable economic conditions in that other country. The correct answer is B.

Outsourcing: The contracting or subcontracting of noncore activities to free up cash, personnel, time, and facilities for activities in which a company holds competitive advantage. Companies having strengths in other areas may contract out data processing, legal, manufacturing, marketing, payroll accounting, or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost. The correct answer is C.

Franchising Alliance: A kind of alliance where a privilege given to a dealer by a manufacturer or franchise service organization to sell the franchiser’s products or services in a given area, with or without exclusivity. Such an alliance can be formed by using a franchise agreement, which may include franchisers’ consultation, assistance, and financing. Franchise is a kind of licensing agreement, which is specialized in selling another firm’s products or services (DePamphilis, 2003). Yhe correct answer is C.

Conglomerate M&A is a form of business combination between two unrelated firms in different industries. The correct answer is E.

Vertical M&A is a form of business combination between two firms of which one them is a supplier, or a customer to another. The correct answer is A.

Cross-border M&A is a form of business combination between two firms in two different countries. The correct answer is A.

In subjugation style, acquired and the acquirer companies are usually in the same industry. The acquirer company makes rapid changes in the organization of the acquired company. Executives are changed, and the identity is dissolved. That means, the acquired company’s configuration is dissolved, and the need for integrating in order to benefit from synergy is high. Synergy is generally expected in terms of economies of scale and economies of scope. The correct answer is D.